Wednesday, 16 January 2013

Recently there has been a fair bit of news about how multinational corporations manipulate income sources in order to book that income in the lowest tax jurisdiction they can. Most of that has focussed on corporate income tax, but there is a serious issue with GST/sales tax that concerns me for New Zealand businesses. Now while I am no great friend of the tax man, in order for NZ companies to operate on a level playing field internationally, there definitely needs to be some work done in the area of GST.

Most large international web platforms (Google, Facebook, LinkedIn etc.) generate a significant portion of their revenue from advertising. So do some our biggest NZ platforms (TradeMe, NZHerald, Stuff etc.). All no doubt attempt corporate income tax minimisation to the nth degree. But the one key difference is that while those onshore platforms (think TradeMe) pay GST on NZ derived AND NZ targeted advertising sales, those offshore platforms (think Google) don't pay GST on EITHER.

Hold on a minute. IRD states specifically on their latest GST guide:

“GST is a 15% tax on the supply (sale) of most goods and services in New Zealand...”How can this be so?

I want to illustrate the unfairness of the current system by comparing Google and TradeMe. Both essentially make money from selling advertising; Google through Adwords PPC, TradeMe via listing and success fees. While TradeMe is specifically NZ, advertisers on Google can choose where in the world their ads are displayed, including NZ only. For the sake of this discussion I will talk about NZ and offshore businesses that specifically target NZ consumers via Google Adwords.So for this discussion, the advertising service in both cases is provided in NZ, to target NZ consumers.

So why is the offshore advertising platform, be that Google PPC or Facebook advertising, GST exempt, while the onshore advertising platform (NZ Herald, radio station, NZ search engine etc.) is forced to charge GST? All of these companies are selling a product (advertising) within NZ, focussed on NZ consumers. Surely they should all be paying GST on those sales?

I think this is blatantly unfair on NZ businesses for the following reasons:

Any NZ online advertising platform (i.e. TradeMe) who wants to compete within NZ against an international online advertiser is automatically at a 15% pricing disadvantage, because they have to charge GST while Google etc. do not.

Any NZ online advertising platform (i.e. TradeMe) who wants to compete outside NZ against an international online advertiser will also have to charge GST to their NZ advertising customers, while the offshore platform does not.

Should a NZ business choose to use a NZ company to manage its PPC campaign, it will be charged GST on PPC fees. But should they use an offshore company, they won't be charged GST.

An overseas advertiser wins twice; they don't pay GST on their advertising costs, and they don't pay GST on the sale of their product/service (but the poor consumer does if they get pinged by customs).

The fact is the advertising service is provided in NZ focussed on the NZ consumer; as such GST should be payable on the advertising cost.So what of the cost? I think the costs fall as follows:

Disincentive for NZ companies to develop online advertising/trading platforms, or websites that derive income from advertising sold within NZ (much better to set up offshore with a .co.nz).

Financial incentive for NZ advertisers to go with the international platforms over local platforms

Disincentive for NZ companies to use local online advertising management services

B2C unfair competition in product and service sellers from overseas for the NZ consumer

Revenue loss for IRD from advertising supplies provided solely in NZ

So, to summarise, Google, being offshore, is not required to charge GST for revenue earned from ads that specifically target New Zealand, yet TradeMe is required to charge GST, irrespective of where the advertiser (or ad viewer) is from. How is this a fair system?

The benefits of enforcing a GST charge on all online advertising targeting NZ would be:

Offshore advertisers would have to pay GST on their advertising costs to NZ consumers, evening things up a little with local NZ businesses

NZ developers would be in a fairer position when it came to developing web properties that rely on advertising revenue

IRD would increase the tax take. In 2009 Google NZ earned an estimated $150 million from NZ advertising; even if only 50% of that was ads targeted to within NZ, then there is revenue to be had, and a lot of it would be foreign exchange (offshore advertisers targeting NZ consumers). Add in Amazon, Facebook, YouTube etc. and target their advertising earnings from ads to NZ and this could be considerable.

By any stretch of the imagination, advertising targeted to be displayed within NZ is a service provided within NZ. It would be a very simple matter for e.g. Google to add GST to any PPC charges earned from within NZ. Why isn’t the government chasing this revenue?

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